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What does the rising rate of home loan deposits mean?

Category Buyer Advice

What does the rising rate of home loan deposits mean?

A third-quarter 2016 release of South Africa’s property market data reveals that the size of deposits as a share of the total price are increasing. The reasons behind this trend are not immediately obvious, so we’ll look at why buyers would choose to put down larger deposits, and what this implies about the behaviour of South Africans in the property market.

Deposit facts

BetterLife’s statistics account for a quarter of South Africa’s residential mortgages registered in the Deeds Office, and provide a reliable account of the state of South Africa’s residential property market.

Over the last three years, South Africa’s residential property market has shown the following notable developments:

  • The average deposit as a share of the purchase price of a residential property has risen from 18% in 2014, to 22% in 2016. 
  • The average deposit has risen from R171,000 in 2014 to R237,000, a 39% increase over two years.
  • Over the same period, the average approved bond increased by 10%, from R760,000 to R839,000
  • The average purchase price increase from 2014 to 2016 was just under 16%, from R931,000 in 2014 to R1,077,000

What do bigger deposits tell us about the South African market?

The big discrepancy between the rate of increase in deposits on properties – 39% – and the size of the average approved bond – 10% – is cause for investigation. If house prices are rising much slower than the size of deposits, as we see in South Africa, what does this say about the market as a whole?

There are a few reasons why a deposit on a residential property is important. In the first, it works as consideration – this means that it shows the seller that the buyer is serious about their intention to purchase the property and will follow through on the balance.

Secondly, it binds the seller to the agreement. Deposits are a show that a sale is going to go through.

But there is no legal requirement to put down a deposit on a residential property – so what has driven deposit sizes to such heights?

The credit crunch

South Africa was not immune from the housing market and credit crisis originating in the US in 2007-2008. South Africa’s banking infrastructure was run on far more conservative lines than US banks, which helped to insulate them from collapse.

However, a facsimile of the property boom seen in the US in that time, which was funded by reckless credit, appeared on South African shores too. There were, if you can remember, a significant number of sub-prime loans on offer, and many mortgages being sold for 100% of the sale price, with lax credit checks. Buyers in these situations would supply a minimal deposit – as low as 5% – and then use the money left over after the sale to fund refurbishments (or whatever they decided).

The fallout from the US crisis negatively affected those borrowers who had been playing the mortgage game – many were forced to declare bankruptcy. To shore South Africa’s finance industry against the risk of mass default, lenders tightened their lending policies, with more oversight given to applicants.

Borrowers burrow down

The risk of default does play on borrowers’ minds – larger deposits mean, in practice, better odds on being granted a mortgage and smaller home loan repayments. Choosing to put down a larger deposit means that adverse circumstances – a loss of income following retrenchment, for instance – are less likely to result in you losing your home.

Part of the reason behind the trend of rising home loan deposits is due to rising interest rates, which have been rising steadily since 2014. Higher interest rates mean larger monthly repayments on all kinds of debt.

What the higher deposits also show is that demand for South African residential property is high. Larger deposits indicate urgency on the buyer’s side – they are keen to secure the home of their dreams.

From a macro-economic perspective, large residential property deposits are a sign of fortitude. They show that South Africans are willing and able to commit to the intensive saving required to secure a place on the property ladder – this is confirmed by the increasing numbers of first-time property buyers. With South Africa’s economy under critical examination from ratings agencies, indicators like deposit size should be seen as a show that there is still economic gold in South Africa.

For more information contact

Betterlife Homeloans on 0800 007 111

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Author: Betterlife

Submitted 24 Nov 16 / Views 968